Japan Inc. faces choppy seas

The blueprint for proposed merger/joint venture plan has fingerprints of Japan's bureaucrats at Ministry of Economy, Trade and Industry (MEITI) all over it. Practically speaking, such business engineering makes little sense.

Separately, according to Nikkei, the three companies will spin off their chip manufacturing divisions and create a new entity focused on production. That joint venture will reportedly receive a huge capital infusion from a Japanese government-backed investment fund called Innovation Network Corp. of Japan (INCJ), and Global Foundries is reportedly expected to become a part of that joint venture.The Nikkei report is sketchy at best since none of the Japanese companies supposedly involved in the deal is talking.

The blueprint for such a complex merger/joint venture plan has fingerprints of Japan’s bureaucrats at Ministry of Economy, Trade and Industry (MEITI) all over it. Practically speaking, such business engineering makes little sense.

The plan may salvage the weaker players of the three (read: Fujitsu and Panasonic) to survive for several more years through government handouts. But the move threatens the potential winner of the three (Renesas Mobile) with a reduction to irrelevancy in the already very competitive mobile SoC market.

Let’s break down the proposed deal.

First, Japan’s semiconductor companies have already undergone a series of consolidations. Renesas merged with the chip division of Mitsubishi, then with NEC’s chip division in 2009.

Even now, Renesas is still sorting out all the assets it acquired through its various transactions. But Renesas made a strategic decision in 2010 to spin off Renesas Mobile, as a 100 percent subsidiary, solely focused on SoCs for the mobile business.

Meanwhile, for Panasonic, the handwriting has been on the wall for awhile. The Japanese consumer electronics giant may have had its moment a decade ago, as it developed its home-grown Uniphier LSI chips, originally designed as an engine for a host of the company’s own digital consumer electronics products. A good idea at the time, and the company indeed harbored ambitions of extending its chip business to external customers. But that plan has steadily faded as SoC power houses in Taiwan like MStar; and MediaTek have emerged in the last several years.

Late last fall, Panasonic announced its plan to shrink its semiconductor business by shedding about 1,000 employees and outsourcing chip production. Panasonic's internal IC consumption, which accounts for 50 percent of its total output, is expected to fall further as the company cuts back TV production. For Panasonic, which has been exploring ways to restructure its semiconductor business, the proposed merger plan with Renesas and Fujitsu must be a God’s send. Suddenly, it has a place to unload its fabs and engineers.

What’s ailing Fujitsu Semiconductor is the lack of a platform. Fujitsu remains primarily an ASIC company. It may excel in crafting great ASICs for domestic system buyers, but it has never been able to transform its business into an ASSP supplier. Again, the assets Fujitsu Semiconductor could bring to the three-way Japan Inc. chip joint venture remains unclear. Perhaps, more Japanese customers, like NTT Docomo. But surely not many global customers.

Even more mysterious is the proposed scenario of merging all three companies’ chip manufacturing units. How could the combined fabs dumped by the three companies become a viable chip production venture? And, precisely, what role will Globalfoundries play?

This whole maneuver of creating two separate JVs (one for chip design and another for chip manufacturing) could be simply a convenient way for the three companies to unload a lot of assets they no longer want – without being painted as “job-killing” villains in the Japanese society. (Layoffs and fab closures are particularly problematic in Japan)

But a lack of leadership, or an endemic case of indecisiveness (postponing the inevitable year after year), is costing the Japanese electronics industry dearly. Once the highest flying industry in the Land of Rising Sun, the electronics sector is now blindly huddling together — like orphans in a boxcar — with little idea of its future.

There is a Japanese saying: “If we cross the street (river, or whatever) together, there will be nothing to fear.” But right now, the view from the boxcar is pretty fearful, and nobody wants to cross the tracks.

Junko is right with "a lack of leadership, or an endemic case of indecisiveness". For instance,"Renesas Mobile, which is looking to become 'the Qualcomm alternative’ in the mobile world" will likely become a dream. As of today, no major mobile phone OEM/ODM ever announced the use of any RMC's SOC. In fact, I am wondering why none of the most recent (of last 10 years at least) leaders of the Japan-based SOC companies ever show any spirit of the Samurai by publicly admitting their shame, given that their companies keep downsized in the past 15 years.

I am not sure if Samurai exist any more except for the Western films...but you have a point here. Definitely the Japanese chip companies are struggling.
How such a proposed consolidation will be translated in the market size, please read Dylan's story here:
http://www.eetimes.com/electronics-blogs/other/4235971/Rumored-Japanese-chip-merger-by-the-numbers

A good business is to make money, to take all the necessary action to right the wrongs, to become prosperous, and to ultimately benefit both the investors and the employees (and their families too). Many of these Japanese companies have aging products, products designed specifically for certain customers (particular of Japanese nature because of the language barrier) and most of them are not the so-called world products, no active & intelligent engineering efforts to "localize" the products, boated human resources, and worst of all, management who are not held accountable for their inabilities. Looking back, in the last 10 years, Japanese companies rarely made as much money (percentage wise) in comparison to their counterparts in the western world. There were more red ink than black ink especially given their size. Put it simply, they are stuck with too many "wrong" products and too many "employees" with the out-dated/wrong skillsets. Due to the social infrastructure, they are not allowed to implement massive lay-off. If the rumor turns out to be true, the result is mostly a slower eventual death. Looking back at history, NEC Semiconductors was rated #1 for memory/microprocessor in 1987 and #10 for SOC/Fabless in 2007 (per Gartner/Dataquest). It now exists only under the shadow of Renesas and is about to spun off hence no longer a whole.
Japanese semiconductor companies are unique in the way that they operate like charity houses.

The Japanese are getting old and slow.
Challenged by the combination of fabless companies in the US who have xferred technology, designs and business to Foundries in lower - cost Taiwan and So. Korea ( who are hungry for business even at low margin ) and the consequent loss of market share in the still enormous N. American market, once huge Japanese brands ( like Sony ) have failed to respond ( with technology, cost - cutting & scale ). Instead system and component ( semiconductor ) houses in Japan have gradually abandoned the price driven N. American market, remained content with their own domestic market that allows high margin and consequently have been shrinking.
But Japan can ill afford to abdicate the cost-driven but still enormous US consumer electronics / auto market to the So. Koreans as even low margins generate huge profit which is then inevitably invested into new technologies that ultimately drive established but smaller competitors out of the market.
Japan has double the population of Germany so cannot follow the strategy of the latter of exporting just BMWs and machine tools. Japan has to continue exporting mid-range consumer products as well.
Mega catastrophe like last years Tsunami still brings out the old Bushido spirit.
Just look at how after some initial fumbling they Japan has undertaken a massive clean up & rebuilding that would have daunted any other "mature/western" societies.
Japan is capable of doing the same for semiconductor as well and triumph over the combination between the Fabless wonders in US and TSMC / Samsung. With whatever system / OEM business Japan has left they can afford at least 2 state of the art 28 nm 300/450 mm Fabs / Foundries and keep them loaded.
To pull ahead of the newcomers who get free access to US R&D, Japan needs to invest a lot more in its own R&D and become aggressive in turning the results into innovative end products.

In review of the country's transfer of payments for the past four quarters and the exceedingly anemic economic growth for the past decade, it could be deduced that their Central Bank is literally strangling the country's entire economy, right before our eyes.
Naturally, their semiconductor industry is drained and in full retreat.

I am going to play the devil's advocate here. In the EE Times Forum and everywhere else I look, this proposal, assuming it's really on the table, is greeted as dead on arrival. Like a desperation move. Well, maybe it is.
But my question is: Why not? These companies have operated for years building chips for their own companies' end products or for mostly Japanese customers. It was a good arrangement in its day, but times have changed. Why not pool their resources and see what they can do? Their best option is to get all of their best designers together and see what they can do (kind of like an All Star team, if you will). Maybe it works, maybe it doesn't. But the status quo is not a realistic option. Why not roll the dice?

A good point. In other words, WHAT OTHER options do they have? Right?
If they don't do some sort of a merger like this, they would be just standing still...
But here's the thing. If they are going to get together, and if they are going to pitch it as a "dream team," we do need a leader who can articulate that dream.
When I cover tech industry, what excites me more than anything else is when people I talk to can convey the sense of mission they feel. Whatever a new initiative, project, merger, I need to hear from someone with a passion: "This is why we are doing this!"
Rather than Nikkei reporting that Japan, belatedly, adopting the fabless business model. That's so-o-o yesterday.

This seems to me to be one more instance of a general issue in computing that has been present for decades. As technology advances, the costs of doing the required R&D, building factories, and making your own components become so high that very few can afford them, and some that can are actually joint ventures and consortiums. Increasingly design shifts to using off the shelf components and manufacturing continues to consolidate to get economies of scale.
The only was I can see this working, given the variety of technologies, design flows, and product types within the organizations to be combined is a ruthless and clear-headed assessment of where opportunities are, what opportunities make economic sense for the converged entity to pursue, and most important, what the new entity should simply *stop* doing.
Given the consensus oriented style of decision making in Japanese industry, I foresee problems. Japanese firms can execute blindingly fast once they have achieved consensus on what should be done, because part of the process of building consensus means that all concerned will agree on what needs to be done and understand what their part in the new direction is and what they must do to achieve it.
But building that consensus takes time, and will be made more complex by the fact that formerly seperate entities will be thrown together into one. Given the speed at which the industry is changing, is there *time* to come to a consensus before it becomes too late?
I think what is really needed is a leader who can simply say "This is what we're going to do.", without the lengthy effort of getting everyone to agree on the needed changes. Agreement can come later. A new direction and overall plan for getting there has to come first, and quickly.

Cynically: Maybe that is exactly why GF is suggested as part of the mix - delegate the tough decisions to a foreign entity so when the tough actions kick in, such as older fab closures and job losses it can be blamed on the culturally ignorant outsiders.